CAR Group Limited (ASX:CAR) will increase its dividend from last year's comparable payment on the 14th of October to A$0.385. This will take the dividend yield to an attractive 2.0%, providing a nice boost to shareholder returns.

View our latest analysis for CAR Group

CAR Group's Earnings Easily Cover The Distributions

If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, the company was paying out 110% of what it was earning and 81% of cash flows. The company could be more focused on returning cash to shareholders, but this could indicate that growth opportunities are few and far between.

Looking forward, earnings per share is forecast to rise by 86.0% over the next year. Assuming the dividend continues along the course it has been charting recently, our estimates show the payout ratio being 63% which brings it into quite a comfortable range.

CAR Group Has A Solid Track Record

The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2014, the annual payment back then was A$0.321, compared to the most recent full-year payment of A$0.77. This works out to be a compound annual growth rate (CAGR) of approximately 9.1% a year over that time. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.

The Dividend's Growth Prospects Are Limited

The company's investors will be pleased to have been receiving dividend income for some time. Earnings have grown at around 4.1% a year for the past five years, which isn't massive but still better than seeing them shrink. So the company has struggled to grow its EPS yet it's still paying out 110% of its earnings. This gives limited room for the company to raise the dividend in the future.

The Dividend Could Prove To Be Unreliable

Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. We would be a touch cautious of relying on this stock primarily for the dividend income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 2 warning signs for CAR Group that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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